Ahead of the Chancellor’s Budget, expected this month, the British Chambers of Commerce (BCC) has today (Sunday) published its latest Economic Forecast.

 The business group maintains a prediction of 1.0% GDP growth in 2010, but it has downgraded its growth expectations for 2011 because the obstacles to a sustained medium-term recovery now appear greater.

 

Despite the downward revision to next year’s GDP forecast, the BCC is more optimistic about the number of job losses the country will experience, reducing its prediction for peak unemployment to 2.65 million by the third quarter of this year.

 

The main features of the BCC forecast include:

 

·         Britain’s economic recovery started in the fourth quarter of last year, but GDP growth will be modest and below the historical average over the next few years. In annual average terms, we are now forecasting positive GDP growth of 1.0% in 2010 and 2.1% in 2011. In our December forecast, we predicted higher growth for 2011, at 2.3%, but this has been downgraded largely because the obstacles to a sustained medium-term recovery now appear greater.

 

·         Unemployment is likely to rise further in the next 6-9 months, and employment will continue to fall but at a slower pace. Our new forecast envisages that total unemployment will increase from 2.46 million (7.8% of the workforce), to a peak of 2.65 million (8.4% of the workforce) in the third quarter of 2010. In December, we predicted a slightly higher jobless peak of 2.7 million.

 

·         BCC forecasts that public sector borrowing will total £163bn (11.6% of GDP) in 2009-10, and £165bn in 2010-11, before easing to £147bn in 2011-12. We expect lower initial deficits than the Treasury predicted in the Pre-Budget Report: £178bn for 2009-10 and £176bn for 2010-11. However, from 2011 onwards, we believe the Treasury’s forecasts are too optimistic. Significantly, this forecast confirms that the UK’s public finances are on an unsustainable medium-term path, with net public sector debt set to increase to dangerous levels in excess of 80% of GDP.

 

·         The forecast assumes that the Monetary Policy Committee (MPC) will maintain the £200 billion currently allocated to the Quantitative Easing (QE) programme over the next few months. We expect the UK Bank Rate to remain at 0.5% until Q3 2010; thereafter, we forecast modest and gradual increases, to 1% in Q4 2010 and to 2.50% in Q4 2011.

 

Commenting, BCC Director General David Frost, said:

 

“The recession may have technically ended, but there is no room for complacency. For the recovery to be sustained, it is crucial that all the political parties recognise the vital role of wealth-creating businesses in driving economic growth and job creation.

 

“The government must use the forthcoming Budget as a platform for laying the foundations for a business-led recovery. If it fails to do so, the recovery will take longer to gain momentum and may even slip into reverse.

 

“New business taxes must be avoided and unnecessary red tape suspended. The 1% hike in employer National Insurance Contributions, planned for April 2011, should be abandoned immediately as it is a tax on jobs, which will cost firms £4.7 billion every year. Raising VAT by one percentage point, to 18.5%, will largely offset any lost revenue and it will be less damaging to business.

 

“The vital medium-term reduction in government debt and borrowing should entail curbing public spending in all areas except for key infrastructure expenditure, which will act to boost long-term growth and employment across the country.

 

“A credible deficit-reduction plan, which both business and the markets can accept as realistic, must avoid stifling the economy’s growth potential, and it absolutely must enable companies to invest and export.”

 

BCC Chief Economist, David Kern, added:

 

“The UK’s economic prospects remain uncertain, our recovery is fragile and risks of a relapse are high. Threats of a double-dip recession are greater in the near future than the dangers of higher inflation. However, Britain’s position is not worse than that of many other European economies. After lagging behind in the second and third quarters of 2009, UK growth in the fourth quarter was stronger than Germany’s and the eurozone as a whole.

 

“Following a slowdown in Q1 2010, due to weather-related disruption and the reversal of the VAT cut, we expect a relatively strong bounce back in UK GDP, driven mainly by stocks and the emergency stimulus packages. However, these factors are temporary and longer-term growth prospects remain weak. The need to significantly cut the UK’s huge budget deficit, strengthen the enfeebled banks, and reduce personal debt will inevitably limit growth in the next few years.

 

“A large part of Britain’s budget deficit is structural rather than cyclical. This structural element will still persist even after the economy returns to normal growth. The financial crisis and the recession added £73 billion, or 5.2% of GDP, to Britain’s structural deficit, mainly due to the permanent loss suffered by the economy’s productive potential. This structural deficit can only be reduced through a combination of carefully considered spending cuts and tax increases.

 

“Cutting the deficit too early would be a major mistake that could unleash a new recession. However, a credible plan for curbing the deficit is urgently needed. Postponing the presentation of a plan would threaten our credit rating with damaging consequences. Any serious plan must spell out detailed measures with a clear timetable, and it must avoid damaging the economy’s growth potential. Freezing the total public sector wage bill and bringing public pensions into line with the private sector must be part of that plan.

 

“Recent improvements in the labour market mask a number of worrying developments, mainly rising inactivity levels and steady falls in the number of people in full-time employment. Despite some positive trends, we expect further increases in the jobless total. UK productivity has recorded big falls in the past two years, and unless the labour market remains flexible and red tape burdens are reduced, there is a risk that productivity could fail to recover, and Britain’s medium-term prospects could be badly impacted.

 

“Over the next four or five years, GDP growth is likely to average just under 2% per annum, considerably less than the 2.7% average growth recorded in the period 2003-07. Against this background, it is vital to ensure that wealth-creating businesses have adequate capacity to respond to an upturn in demand when the recovery strengthens.”